Salazar- Xirinachs Nübler Kozul- José M. Salazar-Xirinachs Wright Irmgard Nübler Richard Kozul-Wright No country has made the arduous journey from widespread rural poverty to post-industrial wealth without employing targeted and selective government policies to modify its economic structure and boost its economic dynamism. TRANSFORMING Building on a description and assessment of the contributions of different economic traditions (neoclassical, structural, institutional and evolutionary economics) to the analysis of policies in support of structural transformation and the generation of productive jobs, this book argues that industrial policy ECONOMIES goes beyond targeting preferred economic activities, sectors and technolo- gies. It also includes the challenge of accelerating learning and the creation of productive capabilities. This perspective encourages a broad and integrated Making industrial policy work approach to industrial policy. Only a coherent set of investment, trade, tech- nology, education and training policies supported by macroeconomic, financial for growth, jobs and development and labour market policies can adequately respond to the myriad challenges of learning and structural transformation faced by countries aiming at achieving development objectives. The book contains analyses of national and sectoral experiences in Costa Rica, the Republic of Korea, India, Brazil, China, South Africa, sub-Saharan Africa and the United States. Practical lessons and fundamental principles for in- dustrial policy design and implementation are distilled from the country case studies. Given the fact that many countries engage in industrial policy today, this collection of contributions on theory and practice can be helpful to policy- makers and practitioners in making industrial policy work for growth, jobs and development. TRANSFORMING ECONOMIES Making industrial policy work growth, for jobs and development ILO TRANSFORMING ECONOMIES Making industrial policy work for growth, jobs and development TRANSFORMING ECONOMIES Making industrial policy work for growth, jobs and development INTERNATIONAL LABOUR OFFICE · GENEVA Copyright © International Labour Organization 2014 First published 2014 Publications of the International Labour Office enjoy copyright under Protocol 2 of the Universal Copy- right Convention. Nevertheless, short excerpts from them may be reproduced without authorization, on condition that the source is indicated. For rights of reproduction or translation, application should be made to ILO Publications (Rights and Permissions), International Labour Office, CH-1211 Geneva 22, Switzerland, or by email: [email protected]. The International Labour Office welcomes such applications. 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Salazar-Xirinachs, José Manuel; Nübler, Irmgard; Kozul-Wright, Richard Transforming economies: Making industrial policy work for growth, jobs and development José Manuel Salazar-Xirinachs, Irmgard Nübler and Richard Kozul-Wright (editors) International Labour Office. – Geneva: ILO, 2014 ISBN 978-92-2-128565-6 (print) ISBN 978-92-2-128566-3 (web pdf) International Labour Office industrial policy / industrial development / catching-up growth / structural transformation / capabilities/ learning strategies / employment / productive jobs / economic development / developed countries / developing countries / 08.01.2 ILO Cataloguing in Publication Data The designations employed in ILO publications, which are in conformity with United Nations practice, and the presentation of material therein do not imply the expression of any opinion whatsoever on the part of the International Labour Office concerning the legal status of any country, area or territory or of its authorities, or concerning the delimitation of its frontiers. 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Graphic and typographic design, manuscript preparation, copy editing, layout and composition, proofreading, printing, electronic publishing and distribution. PRODOC endeavours to use paper sourced from forests managed in an environmentally sustainable and socially responsible manner. Code: CPG-WEI-GEN Contents Editors and Contributors ................................... xi Acknowledgements ....................................... xix List of abbreviations ....................................... xxi Introduction Industrial policy, productive transformation and jobs: Theory, history and practice . 1 José Manuel Salazar-Xirinachs, Irmgard Nübler and Richard Kozul-Wright Part I . Productive transformation: Models and policies 1 . Latin American structuralism and production development strategies ................................ 41 José Antonio Ocampo 1.1 Introduction ..................................... 41 1.2 ECLAC, macroeconomic analysis and structural change ..... 42 1.3 Economic growth and structural change ................. 47 1.4 Conclusions ..................................... 60 2 . Making industrial policy work for development .............. 65 Justin Yifu Lin and Volker Treichel 2.1 Fostering economic growth in developing countries: The evolution of development thinking .................. 66 2.2 What are the principal tenets of successful industrial policy? . 72 2.3 Concluding remarks ............................... 76 v Transforming economies 3 . The role of industrial and exchange rate policies in promoting structural change, productivity and employment ............. 79 Rodrigo Astorga, Mario Cimoli and Gabriel Porcile 3.1 Introduction ..................................... 79 3.2 Employment, structural change and growth in developing economies ............................ 81 3.3 Patterns of structural change, growth and employment in the manufacturing sector .......................... 88 3.4 Where do workers go? Aggregate productivity and employment .................................. 95 3.5 Concluding remarks ............................... 101 Appendix ............................................ 105 4 . A theory of capabilities for productive transformation: Learning to catch up .................................. 113 Irmgard Nübler 4.1 Introduction ..................................... 113 4.2 A dynamic concept of catching up ..................... 117 4.3 A knowledge-based concept of capabilities .............. 123 4.4 A concept of collective learning ....................... 130 4.5 Design and implementation of learning strategies .......... 134 4.6 Conclusions ..................................... 143 5 . Industrial policy in the era of vertically specialized industrialization 151 William Milberg, Xiao Jiang and Gary Gereffi 5.1 Introduction ..................................... 151 5.2. Trade in intermediates, vertical specialization and upgrading .................................... 156 5.3 Industrial policy after the Washington Consensus .......... 164 5.4 Industrial policy and the challenges of VSI ............... 170 5.5 Conclusions ..................................... 173 vi Contents Part II . Rethinking industrial development strategies: The capabilities dimension 6 . Industrial development strategies in Costa Rica: When structural change and domestic capability accumulation diverge ........ 181 Eva Paus 6.1 Introduction ..................................... 181 6.2 The development of technological capabilities in small latecomers in the time of globalization: Analytical considerations ....... 183 6.3 The uneven accumulation of technological capabilities in Costa Rica under ISI ............................. 185 6.4 Structural change and domestic capabilities under the new economic model: Diverging trajectories ...... 190 6.5 Social capability accumulation under the new economic model: Falling behind private sector needs .................... 200 6.6 Conclusions ..................................... 205 7 . Skills development strategies and the high road to development in the Republic of Korea .................. 213 Byung You Cheon 7.1 Introduction ..................................... 213 7.2 Economic development and skills development ........... 214 7.3 Government policy on education and training ............. 220 7.4 New challenges call for new responses .................. 225 7.5 Policy implications ................................. 235 8 . Building capabilities in the software service industry in India: Skill formation and learning of domestic enterprises in value chains